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  4. December 2012
  5. Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence

  • Susan E. Woodward
  • Robert E. Hall
American Economic Review
vol. 102, no. 7, December 2012
(pp. 3249–76)
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Abstract

Mortgage loans are leading examples of transactions where experts on one side of the market take advantage of consumers' lack of knowledge and experience. We study the compensation that borrowers pay to mortgage brokers for assistance from application to closing. Two findings support the conclusion that confused borrowers overpay for brokers' services: (i ) A model of effective shopping shows that borrowers sacrifice at least $1,000 by shopping from too few brokers. (ii ) Borrowers who compensate their brokers with both cash and a commission from the lender pay twice as much as similar borrowers who pay no cash. (JEL D12, D14, G21)

Citation

Woodward, Susan E., and Robert E. Hall. 2012. "Diagnosing Consumer Confusion and Sub-optimal Shopping Effort: Theory and Mortgage-Market Evidence." American Economic Review, 102 (7): 3249–76. DOI: 10.1257/aer.102.7.3249

Additional Materials

JEL Classification

  • D12 Consumer Economics: Empirical Analysis
  • D14 Personal Finance
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages